What do I need to know about undervalued items and insurance?

Question

If my current insurance is only half the current appraised value, and I've not chosen to submit papers to the insurance company to increase the insured value and premium (a separate policy for the item) what do I need to know should I ever need to make a partial or full claim (damage or theft)?

I've operated on the assumption that I will get coverage for the value I pay for. But could there be an unforseen problem?

Answer 1

Oh, yes, there will be a problem.  It's called "coinsurance".  

Not knowing what type of property or what type of policy this is, just about every policy there is, has a provision in it, for people who want to underinsure.  

The clause basically says, if you have a partial loss, and are underinsured, we pay the percentage of the loss that is insured.   Example:  the item is insured at $50,000.   The actual cost to replace the item (note, not "appraised" value, but cost to replace) is $100,000.   You are 50% insured.  If there's  claim for less than the full amount ($100,000), the policy pays the LESSER of the policy limit ($50,000) or half the damage.  So you have a $40,000 claim.  They pay $20,000, less  your deductible.    Heaven forbid there's a fire, they'll also hold back demolition costs, as required in most municipalities.

Bottom line - if you underinsure, you'll be very, very unhappy come claim time.   Which is why "do it yourself" insurance ends up with people blaming insurance companies for THEIR OWN mistakes.